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Income Tax Appellate Tribunal, ‘’ SMC” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
आदेश/O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned four appeal have been filed at the instance of the Revenue against the separate order of the Learned Commissioner of Income Tax (Appeals)- 4, Ahmedabad, of even dated 03/09/2019 arising in the matter of assessment order passed under s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Years 2013-14 to 2016-17. to 1724/AHD/2019 A.Y.s 2013-14 to 2016-17 2
The Revenue has raised following grounds of appeal: That the Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.36,29,308/- on account of loss claimed in trading of penny stock script and commission expenses of Rs.72,586/- incurred for obtaining such business loss.
3. The only issue raised by the Revenue is that the learned CIT (A) erred in deleting the disallowances of bogus trading loss of Rs. 36,29,308/- in penny stock as well as commission expenses of Rs. 72,586/- only.
The facts in brief are that the assessee in the present case is private limited company and engaged in the business activity of capital market. The assessee during the year traded in the scrip of Regency Trust Ltd. The assessee during the year sold 75763 shares of Regency Trust Ltd for Rs. 17,45,092/- out of opening quantity and purchases made during the year. In the process, the assessee incurred a loss of Rs. 36,93,308/- and claimed the same as trading loss.
The AO found that the company i.e. Regency Trust Ltd, incorporated in 1988 and registered as NBFC, was not having any significant business activity. The Regency Trust Ltd as on 19-01-2010 came with preferential allotment of shares. At the time of preferential allotment the scrip of Regency Trust was trading between Rs. 28 to 31 per share. Thereafter, the price of the impugned scrip suddenly sky rocketed and reached as high as to Rs. 111.5 per share as on 06-05-2011. Thereafter, the price of the impugned shares sharply decreased to the level of price before the preferential allotment. During the FY 2011-12, the time when price was sky rocketing, the assessee purchased large volume of shares of impugned scrip.
5.1 As per the AO, the entire modus operandi of preferential allotment, sharp increase in price of share and sudden decrease after certain period of time is nothing but transaction in the nature of penny stock utilized for providing bogus long term capital gain and loss to the intended beneficiaries as highlighted in the investigation to 1724/AHD/2019 A.Y.s 2013-14 to 2016-17 3 report of ADIT Kolkata. The modus operandi shows that share of Regency Trust Ltd was allotted to beneficiaries who wanted to covert unaccounted money into accounted form in the guise of long term capital gain exempted under section 10(38) of the Act. Thereafter, the price of the scrip was manipulated at the stock exchanged by doing circular transaction. The beneficiaries of long term capital gain sold their holding to exit provider who wanted to book loss in their books. The assessee on hand is one of the exit provider which purchased high volume of shares during F.Y. 2011-12 from beneficiaries and the same were sold in subsequent year to claim loss in the book.
5.2 Thus, the AO in view of the above and after referring to the several case laws including the law laid down by the Hon’ble Supreme Court in case of CIT vs. Durga Prasad reported in 82 ITR 540 disallowed the impugned trading loss of Rs. 36,29,308/- only. The AO also made addition of Rs. 72,582/- account of unaccounted commission expenses incurred by the assessee for getting bogus loss on sale of impugned scrip in the manner discussed above.
Aggrieved assessee carried the matter before the ld. CIT(A).
The assessee before the learned CIT-A submitted that it is engaged in the activity of trading in capital market through the stock broker namely JM Financial Services Ltd and SSJ Finance and Securities Ltd, both are recognized by the SEBI. All the transactions of purchase and sale of the scrip of Regency Trust Ltd. were carried out in open market at stock exchange through demat account, supported by the broker note and demat statement. The trading in shares and securities were done in normal business course. Accordingly, the impugned loss was occurred in normal trading of scrip of Regency Trust Ltd. Furthermore, the allegation of the AO that the scrip of Regency Trust was found as a penny stock by the ADIT but on perusal of ADIT report, the same is found to be incorrect. In the said report there is no finding about the scrip of Regency Trust Ltd. The name of its stock broker was to 1724/AHD/2019 A.Y.s 2013-14 to 2016-17 4 also not found in any report or statement. Till the date of passing of assessment order, no order by SEBI, BSE, RBI or any other order was passed against the scrip of Regency Trust Ltd. The AO made addition in arbitrary manner without having any material on record and thus the same needs to be deleted.
7.1 The learned CIT-A after considering the submission of the assessee and facts in totality deleted the addition made by the AO.
Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.
The learned DR before us vehemently supported the stand of the AO by reiterating the findings contained in the assessment order whereas the learned AR before us vehemently supported the stand of the ld. CIT-A by reiterating the findings contained in the appellate order.
I have heard the rival contentions of both the parties and perused the materials available on record. In the present case, the assessee claimed trading loss on sale of shares of Regency Trust Limited for ₹ 36,29,308/- which was treated as bogus and manipulated, leading to the addition by the AO and further addition of Rs. 72,582/- being unaccounted commission paid by the assessee for taking such bogus trading loss. The view of the AO was based on certain factors which have been elaborated in the preceding paragraph. However, the ld. CIT-A, subsequently, was pleased to delete the addition made by the AO, holding the impugned trading loss on account of sale share of Regency Trust Ltd as genuine.
10.1 The 1st controversy arises before us whether the script Regency Trust Ltd is penny stock and appearing in the investigation report carried out by Kolkata investigation wing. Indeed, it has been alleged by the AO that the name of impugned script is appearing in the list of penny stock. In this regard, I note that to 1724/AHD/2019 A.Y.s 2013-14 to 2016-17 5 the AO while making allegation has not made any reference to any specific report except merely a bald statement recorded in the assessment order. The learned CIT- A has given a categorical finding that the DDIT (Inv.) Kolkata carried countrywide investigation with regard to racket of bogus capital gain. On the basis of extensive investigation and enquiry, the DDIT made report in which a list of penny stock companies was identified which were utilized for generating bogus LTCG/STCG/STCL etc. by the certain brokers and entry provider. Such list do not find the name of scrip of Regency Trust Ltd neither the name of broker of the assessee has been mentioned anywhere in such report. At the time of hearing, the learned DR has not brought any iota of evidence against the finding of the learned CIT-A. What has been adopted by the AO for making the addition was the modus of operandi highlighted by the investigation wing of Kolkata. To our understanding, the mere modus of operandi cannot the basis of making the addition or treating the transaction carried out in any share/scrip as bogus until and unless it is supported by the material documents. On analyzing the facts of the present case, I note that the AO on one hand has alleged that the entire transaction carried out in the year under consideration and loss incurred in such transaction as bogus but on the other hand the AO himself accepted the profit earned and disclosed by the assessee from same script in earlier year being F.Y. 2010-11 and 2011-12. As such, the assessee from purchase and sale of scrip of Regency Trust Ltd has declared trading profit of Rs. 30,63,613/- and 16,06,693/- in the F.Y. 2010-11 and 2011-12 whereas the trading loss was shown on the sale/ purchase of same script in the year under consideration and in subsequent years. The profit declared has been accepted by the Revenue but the loss has been denied. Therefore, once profit has been admitted as genuine in earlier year, then loss in the year under consideration and subsequent years from same scrip cannot be doubted until and unless some adverse materials are brought on record. As such, I note that the AO in the present case has taken contradictory stand. to 1724/AHD/2019 A.Y.s 2013-14 to 2016-17 6 10.2 It was also alleged that the price of the share of Regency Trust Ltd. was increased manifolds in a short period of time and there after decreased sharply which was not believed by the authorities below on the principles of preponderance of human probabilities in the given facts and circumstances. The rise in the price of the scripts of a company, having no financial base/business activity/profitability certainly gives rise to the doubt about such increase in the price. But in our considered view, this cannot be a sole criteria for reaching to the conclusion that the price were rigged up to generate the long-term capital gain or loss. Such observation during the assessment proceedings provides reasons to investigate the matter in detail and the same cannot take the place of the evidence. But in the case on hand, there was no enquiry conducted either by the SEBI or the stock exchange with respect to rigging up of share price of the impugned company. Similarly, there was no complaint filed by any of the party either to the SEBI or the stock exchange about the assessee or brokers impleading that they were involved in the activity of rigging up the price of the shares. Similarly, the AO has not conducted an enquiry from the SEBI or BSE about the assessee whether he was engaged in the frivolous activities as alleged.
10.3 I also note that the AO has referred to the investigation carried out by the investigation wing of Kolkata wherein it was unearthed that the certain broker or entry provider have accepted that they have used the scrip of the several paper companies to provide bogus exempted long term capital gain and loss to certain class of beneficiaries in consideration of cash. However, there was no information available on record whether the name of the company, assessee was appearing in the investigation carried out by the investigation wing of Kolkata or any other investigation carried out by the Income Tax Department. It was also not brought based on any material that those broker or entry provider have taken the name of the assessee or the broker of the assessee and provided their services either to the assessee or assessee’s broker. to 1724/AHD/2019 A.Y.s 2013-14 to 2016-17 7 10.4 I also note that there was no dispute raised by the Revenue with respect to the following facts:
1. 1. The shares were purchased and sold in the open market through stock exchange 2. Purchase consideration of share was made through cheque 3. Share was duly dematerialized in demat account 4. Shares were sold through stock exchange after the payment of STT. The transactions have been confirmed by brokers.
5. The payment are received through ECS in demat account 6. Inflow of shares are reflected in demat account. Shares were purchased and transferred through demat account and the seller and buyer are not known to the assessee.
7. The assessee has no nexus or any relation with company, its director or entry operator 8. The opportunity of cross examination has not been extended to the assessee despite having the request from the assessee. 10.5 From the above, conduct of the assessee suggests that he was not involved in rigging or any wrongdoing. The case laws relied by the authorities below are distinguishable from the present facts of the case in so far there was no allegation against the company, its directors/ shareholders.
10.6 In my view, the trading loss generated by the assessee cannot be held as bogus only on the basis of the modus operandi, generalisation, and preponderance of human probabilities. In order to hold, the income earned or loss incurred by the assessee as bogus, specific evidence has to be brought on record by the Revenue to prove that the assessee was involved in the collusion with the entry operator/ stock brokers for such an arrangements. In absence of such finding, it is not justifiable to link the fact or the finding unearthed in case of some third party or parties with the transactions carried out by the assessee. Further the case laws to 1724/AHD/2019 A.Y.s 2013-14 to 2016-17 8 relied by the AO are with regard to the test of human probabilities which may be of greater impact but the same cannot used blindly without disposing off the evidence forwarded by the assessee. In simple words, there were not brought any evidence from independent enquiry to corroborate the allegation. 10.7 Now the controversy also arises whether a person who genuinely involved in the trading of scrip of certain company and in the process incurred loss can be disallowed under provision of the Act in a situation where it is established that the share price of the company was rigged up to extend the benefit to certain parties. The Justice cannot be delivered in a mechanical manner. In other words, what I see on the records available before me, sometime we have to travel beyond it after ignoring the same. Furthermore, while delivering the justice, we have to ensure in this process that culprits should only be punished and no innocent should be castigated. An innocent person should not suffer for the wrongdoings of the other parties. In the case on hand, admittedly there was no evidence available on record suggesting that the assessee or his broker was involved in the rigging up of the price of the script of Regency Trust Ltd. Thus, it appears that the assessee acted in the given facts and circumstances in good-faith.
10.8 In holding so I draw support and guidance from the judgment of Hon’ble Delhi High court in case of Pr. CIT vs. Smt. Krishna Devi reported in 126 taxmann.com 80 where it was held as under: 11. On a perusal of the record, it is easily discernible that in the instant case, the AO had proceeded predominantly on the basis of the analysis of the financials of M/s Gold Line International Finvest Limited. His conclusion and findings against the Respondent are chiefly on the strength of the astounding 4849.2% jump in share prices of the aforesaid company within a span of two years, which is not supported by the financials. On an analysis of the data obtained from the websites, the AO observes that the quantum leap in the share price is not justified; the trade pattern of the aforesaid company did not move along with the sensex; and the financials of the company did not show any reason for the extraordinary performance of its stock. We have nothing adverse to comment on the above analysis, but are concerned with the axiomatic conclusion drawn by the AO that the Respondent had entered into an agreement to convert unaccounted money by claiming fictitious LTCG, which is exempt under section 10(38), in a preplanned manner to evade taxes. The AO extensively relied upon the search and survey operations conducted by the Investigation Wing of the Income-tax Department in Kolkata, Delhi, Mumbai and Ahmedabad on penny stocks, which sets out the modus operandi adopted in the business of providing entries of bogus LTCG. to 1724/AHD/2019 A.Y.s 2013-14 to 2016-17 9 However, the reliance placed on the report, without further corroboration on the basis of cogent material, does not justify his conclusion that the transaction is bogus, sham and nothing other than a racket of accommodation entries. We do notice that the AO made an attempt to delve into the question of infusion of Respondent's unaccounted money, but he did not dig deeper. Notices issued under sections 133(6)/131 of the Act were issued to M/s Gold Line International Finvest Limited, but nothing emerged from this effort. The payment for the shares in question was made by Sh. Salasar Trading Company. Notice was issued to this entity as well, but when the notices were returned unserved, the AO did not take the matter any further. He thereafter simply proceeded on the basis of the financials of the company to come to the conclusion that the transactions were accommodation entries, and thus, fictitious. The conclusion drawn by the AO, that there was an agreement to convert unaccounted money by taking fictitious LTCG in a pre-planned manner, is therefore entirely unsupported by any material on record. This finding is thus purely an assumption based on conjecture made by the AO. This flawed approach forms the reason for the learned ITAT to interfere with the findings of the lower tax authorities. The learned ITAT after considering the entire conspectus of case and the evidence brought on record, held that the Respondent had successfully discharged the initial onus cast upon it under the provisions of Section 68 of the Act. It is recorded that "There is no dispute that the shares of the two companies were purchased online, the payments have been made through banking channel, and the shares were dematerialized and the sales have been routed from de-mat account and the consideration has been received through banking channels." The above noted factors, including the deficient enquiry conducted by the AO and the lack of any independent source or evidence to show that there was an agreement between the Respondent and any other party, prevailed upon the ITAT to take a different view. Before us, Mr. Hossain has not been able to point out any evidence whatsoever to allege that money changed hands between the Respondent and the broker or any other person, or further that some person provided the entry to convert unaccounted money for getting benefit of LTCG, as alleged. In the absence of any such material that could support the case put forth by the Appellant, the additions cannot be sustained.
Mr. Hossain's submissions relating to the startling spike in the share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent.
10.9 Respectfully following the judgment of Hon’ble Delhi High Court (Supra), and in view of the above discussion I hold that the trading loss incurred by the assessee cannot be held bogus merely on the basis of some modus operandi unearthed in case of third party/parties unless some cogent materials are brought against particular assessee on record. Therefore, I don’t find any reason to disturb the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the grounds of Revenue’s appeal are dismissed.
In the result, the appeal of the Revenue is dismissed. to 1724/AHD/2019 A.Y.s 2013-14 to 2016-17 10 Coming to to 1724/Ahd/2019 an appeal by the Revenue corresponding to A.Y. 2014-15 to 2016-17.
At the outset, I note that the issues raised by the Revenue in its appeal for the AY 2014-15 to 2016-17 are identical to the issue raised by the assessee in 2013-14. Therefore, the findings given in shall also be applicable for the Assessment Years 2014- 15, 2015-16 and 2016-17. The appeal of the Revenue for the assessment 2013-14 has been decided by me vide paragraph No.10 of this order in against the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2013-14 shall also be applied for the AYs 2014-15, 2015-16 and 2016-17. Hence, the grounds of appeal filed by the Revenue for AYs 2014-15, 2015- 16 and 2016-17 are hereby dismissed.
12. In the combined result, all the appeals of the Revenue hereby dismissed.
Order pronounced in the Court on 31/10/2022 at Ahmedabad.